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Ask Dr. Don

Auto refinancing

Dear Dr. Don,
How can I refinance my car loan? I currently have a loan with a credit company, but was wondering where I would start to get a better rate.
Matthew Motorsports

Dear Matthew,
The first step is to review your current loan documents. You're looking to make sure that there aren't any prepayment penalties, and that you don't have a loan where interest is calculated based on "The Rule of 78s."

With a loan using this rule, the lender typically collects three-quarters of a loan's interest in the first half of the loan term. Bankrate can help you determine how the interest on your loan is computed. The good news is that most auto loans today don't use this rule.

Refinancing can also mean moving from new car rates to a higher interest rate for used cars. If you're only a few months in on a loan the lender may give you the new-car rate. Otherwise you're going to pay about half a percent more for used-car financing.

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You can shop rates on Bankrate. Financial institutions can and will offer more variety than the categories tracked on Bankrate, but the shop-rates feature gives you an idea which lenders are competitive in your market.

Loan and title fees can eat into your expected savings. Ask the lender for a breakdown of these charges when shopping for your loan.

Try using Bankrate's Should you refinance your mortgage? calculator to estimate the savings when you refinance.

Find out your payoff balance by contacting your lender. Enter the current and new loan terms. Then on the cost side enter 0 for the number of points, input any loan and title fees and put zeros in the other cost columns. The calculator will show your monthly savings and the number of months that it will take to earn back your loan costs.

You can also use Bankrate's auto loan calculator to compare the new payment to your current payment.

-- Posted: April 10, 2002

Read more Dr. Don stories here.
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See Also
When to refinance your other loans
Check your credit before you shop
In auto loans, simple (interest) is best
More Dr. Don stories


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